Aristotle, Usury, and Land in the 21st Century

Bertrand Russell, on Aristotle’s attack on usury in the Politics:

“Usury” [to Aristotle] means all lending money at interest, not only, as now, lending at an exorbitant rate. From Greek times to the present day, mankind, or at least the economically more developed portion of them, have been divided into debtors and creditors;debtors have disapproved of interest, and creditors have approved of it. At most times, landowners have been debtors, while men engaged in commerce have been creditors. The views of philosophers, with few exceptions, have coincided with the pecuniary  interests of their class. Greek philosophers belonged to, or were employed by, the landowning class; they therefore disapproved of interest. Medieval philosophers were churchmen, and the property of the Church was mainly in land ; they therefore saw no reason to revise Aristotle’s opinion. Their objection to usury  was reinforced by anti-Semitism, for most fluid capital was Jewish. Ecclesiastics and barons had their quarrels, sometimes very bitter; but they could combine against the wicked Jew who had tided them over a bad harvest by means of a loan, and considered that he deserved some reward for his thrift.

With the Reformation, the situation changed. Many of the most earnest Protestants were business men, to whom lending money at interest was essential. Consequently first Calvin, and then other Protestant divines, sanctioned interest. At last the
Catholic Church was compelled to follow suit, because the old prohibitions did not suit the modern world. Philosophers, whose incomes are derived from the investments of universities, have favoured interest ever since they ceased to be ecclesiastics and therefore connected with landowning. At every stage, there has been a wealth of theoretical argument to support the economically convenient opinion.

Bertrand Russell, A History of Western Philosophy

The funny thing is that the last few years has shown a marked increase in the relative wealth of landowners– not just agricultural landowners, as in Aristotle’s time, but those lucky enough to own a plot of land in New York City, greater DC, coastal California, London, Singapore, and other scattered desirable locations. As the economist Karl Smith put it in a response to Capital in the 21st Century a few years ago:

Importantly, however, the resurgence in capital is driven almost exclusively by a rise in housing values, and those values stem almost entirely from what classical economists would have termed land. Nominally, the value of real estate in general is divided into the value of land and the value of the structures that sit on the land. Yet, for housing in the modern world there is a third source of value, the option value induced by zoning and land use restrictions. Paris is the perfect example of the powerful effects of such land use restrictions.

The demand for housing in Paris is extremely high in part because Paris is the legislative, financial and commercial capital of France. If you wish to be doing business at a certain level in France then you must live in or around Paris. Yet, there is also another important source of demand from those who wish to experience the legendary culture and beauty of the city and to live in proximity with others who value it. Paris maintains the latter demand in large part by severe restrictions on the height and architecture of buildings within the city. Those restrictions preserve the history of Paris, but also make it impossible for it to house all of the millions who would come today to live and work in the legislative, financial and commercial capital of France. The result is that only those willing and able to pay the highest rents or mortgages can live in Paris and the rest are pushed to the suburbs.

This increase in rents and housing prices is the option value of Paris’s land use restrictions. It is also properly accounted for as a land value, not a capital value. The value does not stem from the creation of new structures, plant or equipment, but by the preservation of an irreproducible bounty handed down to us from previous generations. Irreproducibility and inheritance are the essential features of land in classical economics. Thus, the story here isn’t so much about capital, but about land in the 21st century.

Even today, as in Aristotle’s time, landowners are more likely to be net debtors than net creditors; someone who owns a $3 million Brooklyn brownstone and has a $950,000 mortgage on it certainly has an ample net worth, but would still most likely benefit from a reduction in interest rates and in the relative power of financiers. A university endowment includes now, as in Russell’s time, significant interest-earning assets, but increasingly also is based around vast tracks of land in high-cost areas, like Columbia and NYU’s growing empires in upper and lower Manhattan.

Given this trend, it might not be such a surprise that the last few years have seen a turn against Capital inside and outside the academy. This is not, as Deirdre McCloskey might allege, the clerisy biting the hand that feeds it, but a reallocation of power between land and credit, and a consequent shift in the allegiances of the philosophers employed by them.

 

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